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The 3 Stages of Real Estate Investing – It’s kind of Like falling in love

The 3 Stages of Real Estate Investing

After binge watching a few seasons of Fixer Upper, we can all see ourselves breathing new life into an old, dilapidated home. Enchanted with the outcome and the 30-minute-episode process many a would-be real estate investor begin the research and house hunting process.

While they’ve yet to make their first investment purchase they’re infatuated with the thought of it.

The 3 Stages of Real Estate Investing

When we bought our first flip in 2002 we were fresh out of our first home purchase, armed with the knowledge of construction and the buying process. We owned a big commercial construction company. We were READY! Or so we thought.

We had passion in spades but hadn’t considered all the costs of selling (ahem, 8.3% in our market) or carrying costs (two mortgages, anyone?). We also neglected to add a reasonable buffer to our equation of construction costs. Old homes, great buy or not, need a really healthy margin in the budget for their many unknowns. We were able to fix it up and recoup our costs but not much else, certainly no profit margin.

We were courting the process and trying to decide if it was right for us. Fortunately we learned a lot, created lots of ways to analyze profitability… and it was the first of many investment properties for us. Which brings us to the next stage.

The 3 Stages of Real Estate Investing

HEAD OVER HEELS – the second stage

After the initial infatuation comes the second stage – Head over Heels. This is the novice investor who has a successful transaction or two under their belt. They’ve done a flip, are getting a feel for the process and have just dipped their toes in the waters of the investing pool. Most are riding a high from the competitive seller’s market and haven’t yet experienced any other type of real estate market in the cyclical tides of the industry.

They’re seeing life and real estate investing through lovely, rose colored glasses.

The caution in this stage is heeding the wisdom of those who’ve gone before you – and are further along in the process. Like varying your investment practices. Flipping homes is a short term investment and works really well in some market cycles. Longer term investments, like residential or commercial rentals, are another sound strategy to evaluate, especially in softer markets.

As you begin to plan your life with your new love of real estate investing, think through the “in sickness and in health” part of your vows. Real estate can be a very sound, long term investing strategy but it’s not always rosy.

There’s also market cycles to beware of. Study people who’ve been doing this a while and watch how they invest in a strong or soft market. Study the market cycles in your area over the last few decades. When the real estate market is strong and the economy is supporting wage growth Buyers have confidence to purchase homes and businesses. What is your strategy for the market shrinking? For a Buyer’s market?

Don’t buy into the frenzy of freshly minted investors and let the hype cloud your number-crunching judgment. Stick to your plan. Make wise purchases.

You can be in love with your new venture just try to keep a sound head on your shoulders.

The 3 Stages of Real Estate Investing

Those who have been doing this relationship game a while have a different perspective. They’ve gleaned some wisdom over the years, learning from their mistakes and from others. I speak from experience here. When the bubble burst we saw character revealed in lots of good and not so good ways. These are the people I try to learn from, the ones who have been at it a while.

They’re comfortable in their own skin, not trying to prove anything.

In fact, these are the ones who don’t tell you initially they invest. They may own half the town but it’s a business and just like any business it has its highs and lows.

They’ve seen enough market cycles to know that buy-and-hold can be a good strategy or selling when it’s high and buying when it’s low is wise. These investors have a lot of experience under their belt as well as the financial savvy to actually analyze the investment without buying into the hype.

Like an old married couple who have weathered a few seasons of life, this is the real deal.

So how do you determine the investor type?
* My first question is usually how long they’ve been doing it.
* Then how many homes they’ve invested in.
The most seasoned investors may respond by speaking another language, saying things like, “I’ve got 600 doors in my portfolio at the moment” or “depending on the revenue stream it’s between 200 and..”.

Translation for lay people: their real estate investment portfolio includes 600 of something, it could be apartments or other multi-family, single family, commercial or mixed use. And they use various business models for different kinds of real estate investments, i.e. short term like fix and flip or long term – land lease, rentals, commercial buildings for different kinds of investing.
This will help you determine if you’re dealing with someone who actually has some experience in the market or just someone who is binge watching HGTV (because, don’t we all love a little Fixer Upper??)….or maybe even someone just admiring the infomercial get-rich-quick real estate schemes.

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